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Read the case study below and answer the following questions:
Tesla Advances Its EVs by Rethinking Traditional Automotive Supply Chain Practices.
Historically, the automobile industry has pioneered an impressive number of supply chain innovations. Ford’s assembly line and Toyota’s lean manufacturing technique for instance, were extremely valuable for the development of supply chains in other industries. Given the backlash against fossil fuel-guzzling cars, it seemed like the golden age of automobile-inspired innovation was over.
Enter Tesla. There are quite a few companies also in the electric vehicle (EV) business, including formidable automobile giants such as Toyota and Ford. Tesla however, stands out as the only EV maker that has truly captured the public’s imagination.
Since it was founded in 2003, Tesla has become the premier electric vehicle (EV) manufacturer globally. The company’s philosophy has centralised on optimising the consumer experience and bringing to market a product that customers really want. Tesla vehicles offer drivers access to a unique blend of comfort, style, technology, and performance. None of this, however, is possible without an incredibly sophisticated supply chain system that simultaneously reflects Tesla’s values.
While there are many attributes that differentiate Tesla from other EV manufacturers, one of the most notable is its supply chain. Tesla and its polarizing CEO, Elon Musk, knew that producing some of the most advanced vehicles on the market would require the company to rethink traditional automotive supply chain practices.
The underlying Tesla’s business model is an idea that has been critical to their success – willingness (almost to the extreme) to take complete ownership of the supply chain, from the technological vision of the company to the end consumer experience.
Tesla designs, manufactures, sells, and services thought their own sales and service network. It’s not an exaggeration to say that Telsa has played an important role in the transformation of the automobile business, particularly in customer-facing practices.
Consumers in the US for instance, can go online to purchase their Tesla and choose amongst a wide array of customisation options. In their Beijing showrooms, Tesla has gone so far as to allow payment through WeChat, China’s most popular mobile messaging app. Customers that have paid though this service will also automatically “follow” the company’s updates, allowing customers to feel more engaged with the company as they wait for the delivery of their vehicle.
Despite Tesla’s phenomenal growth in the pas few years, the company is still one of the smallest auto manufacturers in the world. This means that unlike many of its competitors, Tesla cannot independently enjoy the same economies of scale. Due to the nature of their product, Tesla also has to deal with suppliers that don’t usually work with car manufacturers at all – such as battery suppliers.
Peter Carlsson, Tesla’s VP of Supply Chain, says that Tesla is trying to develop vehicles faster than their competitors. “We really want to be able to develop vehicles in a 2-and-a-half-year time frame.” Tesla also manufactures some semiconductor chips in-house. Its R&D team is capable to rewrite its vehicle software as well, which allowed it to substitute alternative options for its regular chips. This high degree of flexibility allowed Tesla to minimize disruptions to vehicle production while some other manufacturers had to shut down operations altogether.
In short, Tesla recognised the complex supply chain in the automotive industry and revolutionised the industry by using vertical integration. It takes complete ownership of the supply chain by carefully picking and choosing between conventional manufacturing practices and custom designing others that are unique to its own product. In addition to pursing its vertical backward integration strategy, Tesla is also ensuring good chemistry with its suppliers.
Also, Tesla has been vocal in their rejection of the traditional franchise-dealer sales model. Preferring instead of selling directly to their consumers, the company argues that the laws prohibiting these transactions are outdated – and the consumer is bearing the brunt of the additional cost. A report published by Goldman Sachs, an investment bank, estimates that the savings for consumers in the direct-to-consumer model is around $2,225 for a $26,000 vehicle, or around 8.6%.
Cutting out the dealership rung of the supply chain has been a challenge- several states in America have filed petitions to shut Tesla down. Despite these restrictions, the company continues to grow even in disputed areas – operating a workaround where customers can view the vehicles in showrooms but must complete orders online of on the phone and have cars shipped in from elsewhere.
Based on the information given in the article above, examine Tesla’s vertical integration strategies and its benefits. Provide examples to support.
Determine the supply chain challenges facing the automotive industry and propose appropriate remedies.